Supreme Court hears wine case

Big implications for consumers, regulators, vintners

CorbettB. Daly

WilliamSpain

WASHINGTON (CBS.MW) -- A coalition of small wine producers urged the U.S. Supreme Court on Wednesday to strike down as unconstitutional state prohibitions on the direct shipment of out-of-state wine.

Meanwhile, attorneys for Michigan and New York argued that the laws are necessary to ensure adequate policing and regulation of the industry.

In Granholm v. Heald, which consolidated similar cases from the two states, the high court is considering whether states have the right to bar direct-to-consumer wine shipments from other jurisdictions, while permitting them for in-state wineries.

The case pits two constitutional principles against each other, namely the right of Congress to alone regulate interstate commerce vs. the 21st Amendment. The latter repealed nationwide Prohibition, but gave individual states wide powers to decide whether and what their residents get to drink -- and how much they'll pay for that privilege. See previous story.

Lower courts have been split on the issue.

Michigan and New York attorneys argued before eight justices -- Chief Justice William Rehnquist is out ill -- that the 21st Amendment trumps all other interests and permits states to limit sales to out-of-state customers.

"Alcohol is different" from other products, Thomas Casey, Michigan's solicitor general, said on the courthouse steps after oral arguments.

More than 30 state attorneys general have sided with Michigan and New York. Five others, including from California -- which produces about 90 percent of all U.S. wine -- have taken the shippers' side.

The winemakers say that states cannot use alcohol regulations to explicitly discriminate against makers from other jurisdictions in order to protect an in-state industry.

"It's not different for purposes of discrimination," said Kathleen Sullivan, former dean of the Stanford Law School, and a lawyer for the shippers.

Several justices questioned the rationale behind the discrimination.

"You have a very substantial burden to show that this discrimination ... is justified," Justice Anthony Kennedy said to Casey.

And Justice Stephen Breyer told him that if there was case law stating that discrimination was permitted, "now is the time to point (those cases) out."

The states argued that they would not be able to properly enforce laws prohibiting underage drinkers from buying alcohol if out-of-states wine sales are permitted.

"The state can't meaningfully oversee the sales of alcohol with an out-of-state entity," said Caitlin Halligan, solicitor general of New York, told the court.

Halligan said New York law allows out-of-state entities to set up a physical presence in New York so inspectors can come and inspect the warehouse and compare physical holdings with business records.

The wine producers say that is impossible and unrealistic for small wineries to do in all 50 states and thus inherently discriminatory.

Casey argued that allowing wine sales over the Internet would lead to sales of other types of alcohol, which are now entirely banned, even within state lines.

"If we lose, the whole system of alcohol regulation in this country is in jeopardy," Casey said.

Kenneth Starr, the former special prosecutor who was Bill Clinton's nemesis in the late 1990s, said the argument about protecting minors from obtaining alcohol is a red-herring.

"It's insulting, it's wrong, it's discriminatory," said Starr, who is on the legal team for the wineries. "It's only the wholesalers who have a very profitable oligarchy" who want to keep the restrictions.

"I think that the wine dispute does involve a peculiarity in the Constitution that sets it apart from other e-commerce cases because of the 21st Amendment," said Behnam Dayanim, a partner with law firm Paul Hastings in Washington.

"But having said that, I believe underlying issues are popping up," he continued, including whether a physical presence in a state is necessary to accountability, as Michigan and New York have maintained.

Dayanim noted that many other businesses, notably automobile sales, gambling and financial services have traditionally been regulated by individual states. But with the growth of the Internet, those, too, have opened up to out-of-state competition.

The lesson of the case, he said, "is that these issues really need to be decided as matters of public policy in legislatures and Congress and not by the courts."

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